International Gathering Seeks to Give ‘Social Investing’ Mass Appeal

CONFERENCE NOTEBOOK

Al Gore is so convinced that companies whose operations are socially and environmentally responsible have a competitive

edge over other businesses, the former vice president has started an investment-management company based on that principle.

“We try to find profitable opportunities for our investors by using a methodology that integrates these factors in order to prove the case that it is directly relevant in the marketplace,” Mr. Gore told participants at the Skoll World Forum on Social Entrepreneurship at Oxford University’s Said Business School. “Over time, if we can prove that, then we hope to change the behavior of investors generally.”

More than 600 nonprofit leaders, business executives, and others from 40 countries gathered here to discuss new ways to combine business strategies and philanthropy to promote social change.

Generation Investment Management — the company that Mr. Gore co-founded with David Blood, former chief executive officer of Goldman Sachs Asset Management — has a team of analysts, two-thirds of whom are traditional financial analysts and one-third so-called sustainability researchers.

When the team analyzes companies and industries in which Generation might invest, it looks at the traditional financial factors that all analysts would examine, such as market position and competitive advantage, but it also looks at social and environmental factors.

For example, when Generation’s analysts looked at the automobile industry, they considered how closely each company’s profits were tied to the consumption of fossil fuels.

“Whether you think that it’s going to be consumer preferences, or government action, or the rising price of carbon-based fuels, or some combination thereof, it seemed apparent to our team that companies that did a better job of planning for lower carbon intensity were going to be better-positioned over the longer term,” said Mr. Gore.

Taking that long-term approach to investing is key to Generation’s approach, said Mr. Gore.

“The short-term mania in markets has produced a bizarre and irrational system for allocating capital that is designed mainly to try to second-guess all of the other speculators,” he said. “This chasing of the froth excludes the environment, excludes social value, excludes the community almost routinely.”

Institutional investors in Europe and Australia make up the biggest portion of the company’s clients, according to Mr. Blood, who serves as Generation’s managing partner. He said he has seen some interest in the idea in the United States, mostly from state pension funds and wealthy families, but also from some foundations.

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One of the central themes of the meeting was how social entrepreneurs — both nonprofit organizations that are taking new approaches to tackling societal problems and for-profit businesses that have an explicit social purpose — can gain access to new forms of financing, particularly in mainstream capital markets.

In many cases, grant income is not enough, and the amount of money in the capital market dwarfs the amount of money in traditional philanthropy many times over, said Jed Emerson, a senior fellow at the Generation Foundation, in London, and a visiting fellow at the Skoll Centre for Social Entrepreneurship, in Oxford.

“In a lot of cases, it’s possible to get start-up money and to demonstrate proof of concept,” he said. “But then it becomes very difficult once you’ve been in operation for a couple of years to get the next stage of funding that you need in order to really execute and grow your organization, and develop your strategies to the next level.”

One of the examples Mr. Emerson gave in his presentation at the conference came from the world of microfinance, where nonprofit organizations and others make very small loans to people in the developing world to start businesses.

In time many of these microfinance institutions get to a point where they have lent all of their capital and need additional money to lend. Developing World Markets, a company in Darien, Conn., has been able to create investments that pay market-rate returns and then channel that capital to the microfinance institutions, which use the money to make new loans to small borrowers. The investors, in turn, receive a financial return as the microfinance institution repays the loan financed by the investment.

Mr. Emerson said that microfinance is an obvious starting point for such investment deals because of the field’s 30-year track record and because work in the field so closely mirrors traditional finance. Community-development banking and low-cost housing, he said, are two other areas that are starting to experiment with strategies to gain access to traditional capital.

Several obstacles stand in the way of social enterprises’ widespread access to traditional capital. One of the most important, said Mr. Emerson, is the lack of an independent rating system to evaluate social-enterprise investment opportunities.

“If I’m an investor and I’m considering a certain opportunity, if I have to go in and do my own due diligence on each and every opportunity that I’m looking at, it’s a very slow and inefficient process,” he said. “Whereas if I can trust that a third party has looked at 10 organizations and given them ratings, then I can trust that what I’m buying is what it is I think I’m buying.”

Mr. Emerson told conference participants that he was extremely excited by the financing developments in the field of social enterprise, but also a little scared.

“We need to be very careful,” he said, “because all we need is one of these funds to go down in the next 10 to 15 years, and the game is over for another 20.”

A new paper on this topic that Mr. Emerson and Joshua Spitzer wrote for the World Economic Forum, in Geneva, Switzerland, should be available online soon at http://www.blendedvalue.org.

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The importance of finding ways to greatly expand the amount of money devoted to social enterprises was a recurring theme of the conference.

“Money talks — and so establishing a footprint that is large enough to show that this is a viable industry is one of our goals,” says Jacqueline Novogratz, chief executive officer of the Acumen Fund, in New York.

The Acumen Fund is a nonprofit group that uses philanthropic dollars to buy equity in or make loans to organizations, either nonprofit or for-profit, that are building businesses in health, housing, and water that deliver services to the very poor in six developing countries.

The organization’s housing work in Pakistan is a good example of how charitable funds can “unleash more traditional financial capital,” Ms. Novogratz said in a panel discussion. With a combination of philanthropic and government funds, she explained, Acumen was able to extend a $5-million loan guarantee to banks in Pakistan, which spurred the banks to use $50-million of their own money to create the country’s first commercial mortgage program for the poor.

Five years after its founding, the Acumen Fund has $20-million in assets under its management. The organization, Ms. Novogratz said, intends to reach the $100-million mark by 2010, and would like to reach $1-billion 10 years from now.

Scale was also very much on the mind of Bill Drayton, chief executive officer of Ashoka, an international organization with American offices in Arlington, Va., that offers three-year fellowships to create or expand public-service projects.

But he said social entrepreneurs too often focus on where the money is going to come from. What’s really needed, he argued, is “greater deal flow,” or more high-quality opportunities for the market to invest in.

“For anything to work, you have to have the transaction costs be very low, which means high volume, low risk,” said Mr. Drayton. “And that’s a function of working on the supply side.”

Sir Ronald Cohen takes a different view. “The supply of money creates its own demand,” he told the gathering.

A longtime leader in the venture-capital industry in Britain, Sir Ronald was chair of the Social Investment Taskforce, a government-appointed commission that looked into possible solutions to the problem of underinvestment in Britain’s poorest regions.

Through his work on the task force, he said, he became convinced that “hub-and-spoke organizations” that raise capital at the national level and distribute it locally are necessary to increase the flow of money to the field of social enterprise. As an example, he pointed to the Local Initiative Support Corporation, a New York organization that raises money from governments, grant makers, and other sources, and then makes it available to local development organizations.

“If we are able to establish these organizations, we will begin to see much more substantial capital flow through,” said Sir Ronald.

He added:”When social entrepreneurs know — just as business entrepreneurs knew — that capital was easy to raise to achieve their objectives, they went out and they got it.”

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On the final day of the meeting, the discussion turned to the question of whether creating a “social-capital market” should be the ultimate goal of social entrepreneurs. But it turned out that the idea meant different things to different people.

Three years ago, Bovespa, Brazil’s stock exchange, created a social stock exchange to match donors with nonprofit organizations.

The 43 charities that are listed on the exchange establish how much money they need to raise for particular projects, and then brokers across the country sell “social shares” in the nonprofit organization.

The organizations don’t pay investors a dividend, but instead return a “social profit,” explained Celso Grecco, who set up the social stock exchange and serves as president of Atitude, a corporate-responsibility and social-marketing company in São Paulo, Brazil.

“We are creating a culture of social investment,” said Mr. Grecco, who noted that most of Brazil’s nonprofit groups had been created only in the past two decades, and that the country offers few tax incentives to encourage charitable donations.

Muhammad Yunus envisions a free-standing social stock exchange that lists businesses dedicated to creating social good, but that provide little or no financial returns to investors.

Mr. Yunus has been a longtime leader of the social-enterprise movement and is founder of the Grameen Bank, in Bangladesh, one of the first microfinance institutions.

Investors go to traditional stock markets to invest in the companies that they believe will bring them the biggest financial return, said Mr. Yunus.

Investors, he said, would go to the social stock market to find the social-purpose businesses that would create the most benefit to society.

“When you talk about the social stock exchange versus the conventional stock exchange, you’re not just talking about different buildings,” he said. “It’s a whole new way of thinking.”

Mr. Yunus has written a paper about his idea, which is available online at http://www.grameen-info.org/bank/socialbusinessentrepreneurs.htm.

But Mark Campanale, who is head of sustainable and responsible investment at Henderson Global Investors, in London, said talk of creating a social stock market is premature.

When he conducted research on who was investing in social-purpose businesses that were listed on an exchange that brought together investors with early-stage enterprises, he was surprised to learn the companies’ list of shareholders did not include any private foundations.

Instead, the lists included individuals and investment companies like Morgan Stanley.

Mr. Campanale said more education is necessary to let foundations and other social investors know what opportunities are already available.

“You can’t argue for the creation of a social stock market,” he said, “until you ask the question, What is wrong with the existing markets first.”

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Highlights from the social-enterprise meeting are available at the Skoll Foundation’s Social Edge Web site. Go to http://www.socialedge.org.